Helios Technologies, Inc. (HLIO) Q4 2011 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Sun Hydraulics Corporation 2011 Fourth Quarter and Year End Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Rich Arter. Please go ahead, sir.

Thank you, Dana. Good morning, and thanks for joining us. Allen Carlson, Sun's President and CEO; and Tricia Fulton; Sun's Chief Financial Officer are participating in today's call. Please be aware that any statements made in today's presentation that are not historical facts are considered forward-looking statements. For more information on forward-looking statements, please see yesterday's press release. We will take questions once we have completed our prepared remarks. It is now my pleasure to introduce Allen Carlson.

Thanks, Rich. Good morning, and thank you all for joining us. 2011 proved to be a great year. Sales were up 36%, and earnings were up 76%. Most of the growth was achieved in the first 3 quarters of the year. Even though business tailed off considerably in the fourth quarter, Sun achieved new records for the year in both revenues and earnings. North American sales led the way last year, with Europe and Asia Pacific close behind. Demand is strong in all the major geographic markets heading into 2012. We're very pleased to announce another shared distribution. The shared distribution is an excellent method by which stakeholders can share in Sun's operational success. The total amount distributed this year is $7.7 million, with approximately 60% going to employees and 40% to shareholders. We did many things last year to continue to position Sun for the future. In January, we opened a representative sales office in China. This helped us grow our business there by 49%. We're aggressively adding distributors and systems integrators in the country to gain more coverage. We also added 2 engineers to our staffs, who each spent more than 3 months in Sarasota last year to immerse themselves on our products, capabilities and culture. Despite an end of the year slowdown in the region, we expect China to regain its growth trajectory in the long term. In September, we completed the acquisition of HCT, the electronics control company in which we took a financial position in 2007. HCT's products and capabilities are complementary to Sun's and will help us compete more effectively and completely. Being a Sun company will expand HCT's reach geographically. Each company expects to see enhanced opportunities in the marketplace. We added approximately 140 people to our payroll in 2011, 36 of them…

Thanks, Al. 2011 was a record year for Sun. With sales exceeding $200 million, we were able to gain significant operating leverage. Both margins for the first 3 quarters of the year exceeded 39% and were approximately 37% in Q4. Decrease in Q4 was due in large part to the lower sales volume. With rising sales estimates, we expect to gain some of our operating leverage back in Q1. I'm happy to report that HCT has been fully integrated on the administrative side. And at January, HCT held their first distributor training class at Sun. We provided an opportunity for HCT to showcase their products to Sun and HCT distributor channel partners. As Al mentioned, we expect to see enhanced opportunities in the marketplace for both Sun and HCT. In 2008, the board introduced the concept of a shared distribution as a way to reward employees and shareholders when Sun has a successful year. The shared distribution is considered annually by the board. This year, as part of the shared distribution, approximately $4.6 million will be paid in the form of Sun stock into employee retirement plans, and shareholders will receive a cash dividend of $0.12 per share, which will be paid on March 31 to shareholders of record on March 22. We are pleased our results allow us to reward the stakeholders of Sun. Let's look now at the numbers for the fourth quarter and year. All prior EPS figures reflect the 50% stock dividends recorded on June 30, 2011. In the fourth quarter, sales were up 9% and earnings were down 3% compared to Q4 last year. 2011 earnings were impacted by tax adjustments of approximately $0.03 per share. For the year, sales were $204 million, up 36% compared to last year. North American sales increased 40%; Europe,…

[Operator Instructions] And we'll go first to Mig Dobre with Robert W. Baird.

First question for me, guys, I'm trying to get a little more color on growth progression through the quarter and the way growth has progressed into the first quarter as you're sort of putting together your outlook and guidance for the quarter, any color there?

Sure. In January, we saw an increase in orders off of our run rates from Q4, which increased again in February and are continuing at that rate throughout March. So throughout the quarter, we've seen an increase in the order rates, and we flattened that out at this point.

Is there -- are there any particular end markets or geographies that you really see in -- as incrementally positive here, or this more of a general?

I think it's a general increase overall. North America maybe is up a little bit more than Europe and Asia at this point, but they're all pretty close.

Okay. And then looking at China, you guys have commented about a slowdown at the end of the year. So I guess there is 2 things I'm wondering. First, year-to-date in 2012, how would you quantify the run rate there after adjusting for the New Year impact? And secondarily, how would you quantify the exposure to the Chinese construction equipment market? And I'm imagining that part of the slowdown there has been slowing of activity in that regard. Can you give us any color?

This is Al. What we saw in China was a pretty strong 2010, accelerating in the first half of 2011. And the Chinese government in early 2011 became fearful of inflationary impacts, especially as it relates to food and housing. So they tightened the monetary policy early 2011 to cool off the economy. That had an effect in the latter half of 2011. But by -- towards the end of year, they realized that the inflationary problems that they were concerned about pretty much diminished. Things got back to normal in terms of inflation on core food products particularly, and it began loosening the monetary policy, which they're continuing to do as we speak. But I think what we'll see is in the latter half of 2012, the Chinese economy will accelerate. I think the GDP in China right now is somewheres around 7.5% or 8%. And for them, that's a cool economy, and they would like to see it accelerate. And so I think 2012 will kind of be like a reverse image of 2011.

Yes, and that make sense. I mean, that very much is in line with what a lot of OEMs have kind of forecasted for China. But I guess I'm wondering, is there anything that you guys can comment on as far as your exposure to the construction equipment market there?

Yes. We have a very, very broad market around the world. We're not reliant on any one business segment. Obviously, construction equipment is a core business for us. But there's other pieces of mobile equipment, perhaps, that are even more significant than construction equipment. And when you talk about construction equipment, it really depends upon what type of construction equipment. Road construction, for example, is pretty significant. Building infrastructure, like bridges, is significant. But heavy earth-moving equipment is not significant. So we are very, very diverse, and it's difficult to see what's going on in one business segment having a major impact in Sun. It's highly unlikely.

[Operator Instructions] We'll go next to Jon Braatz of Kansas City Capital.

In January, you announced the $16 million expansion of your facility in Sarasota. Will we be seeing some costs from that expansion that are sort of unabsorbed this year or next year? How do you look at the cost of that expansion?

Okay, let me try to answer that, and then Tricia can jump in with perhaps a little bit more detail. We purchased land for an expansion probably 4, 5 years ago. And we continue to be looking at our capacity and needs going forward. We have announced a plan, if you would, going forward that includes about a $16 million expansion. However, what we've done really is just permitted for that and doing some site preparation work at this time. We have not pulled -- pressed the go button, for example, on moving forward with that expansion. I liken it to sort of teeing the ball up to be ready when we do need it. But we are not actually doing construction. Why did we announce it, if that's the case? Well, because when we start permitting, it becomes public. And so to avoid getting all kinds of questions from the local press and media, we just announced future expansion plans. But there are no hard numbers and dates as to when that will actually take place and when it will impact our financials.

On a cash perspective, we've included about $3 million in our fixed asset forecast for the site preparation work, but there is no additional money in that forecast to move forward with the building at this point.

So I guess the question would be if business continues and sales continue to grow, let's say, 10%, 15% or whatever, would you envision that you would have to begin to push that button, so to speak, latter half of this year? How does your capacity utilization rate, if you want to call it that, begin to look if we see sort of a modest growth this year of maybe 10%, 15% something like that?

Okay. I think the question really is -- or the answer to the question really is what do we need to do versus what we want to do, and they're 2 different things. What do we need to do? We're probably in pretty good shape for quite some time in terms of capacity utilization. In fact, we don't even measure capacity utilization. We measure our capacity capability by what constraints are in front of us. And if I look at the outlook right now, constraints -- building is not a constraint to us continuing to shift. Having said that, let's talk about what do we want to do. There's a time when -- an ideal time to build additional bricks and mortar, and you don't want to do that at the top of a cycle. You want to do that at the bottom of a cycle. It's like building a home. You don't want to do it when every plumber and carpenter or electrician in the area is employed and you can't find people. So we're looking also at the local landscape in terms of when is really a good time to build it. Not that we need it, but it's just a good time to do it. So those 2 things are coming into play, and no decisions have been made at this time.

I would -- I don't know this. I don't live in Florida, but I would think that maybe Florida's real estate market and construction market is rather depressed at this point or...

Yes, it is. It's great -- it's a great time to buy property, to build buildings. There's an abundance of workforce. You're probably going to be able to build a facility for 15% or 20% less than you would 2 or 3 years from now. So it's a matter of kind of like timing this as opposed to -- do we need to do it? No, but we may want to.

And at this time, there are no further questions in the queue. [Operator Instructions] And Mr. Arter, it appears there are no further questions.

Thank you, Dana. Thank you all for joining us and listening in and those of you that asked questions. We'll be back in March with our first quarter conference call. Thank you.

Again, that does conclude today's presentation. We thank you for your participation.